MINING’S PAST OFFERS GOLDEN OPPORTUNITY

MINING’S PAST OFFERS GOLDEN OPPORTUNITY

Abitibi Royalties CEO touts ‘one company, one mine’ mantra

You look back to the great fortunes that have been made in Canada, it’s always been one mine per company.

Ian Ball, the 35-year-old chief executive of Abitibi Royalties Inc. with a reputation for being a disrupter in an aging industry, has a radical — if not novel — thesis on how to reinvigorate excitement for gold mining: a return to the days of “one company, one mine.”

In other words, Ball, who first bought gold stocks with his allowance at the age of five and became president of McEwen Mining Inc. when he was 31, yearns for the golden days of mining.

“You look back to the great fortunes that have been made in Canada, it’s always been one mine per company: It was Goldstrike: Barrick; Red Lake: Goldcorp; LaRonde: Agnico Eagle,” he said. “When they started diversifying was when the returns started to go down.”

The industry is in need of bold ideas amid a 2017 gold price outlook that isn’t much better than 2016, when many, Ball noted, thought the bull market would return. It didn’t. Gold prices ended the year up 8.5 per cent, but the gain was won in the first half of the year as prices finished the year around US$1,150 an ounce, down 16 per cent from their July peak.

Some gold bugs believe bullion has no where to go but up amid heightened political and economic instability, but other observers are calling for sub-US$1,200 prices in 2017 given the improved equity and economic outlooks.

After a brief overnight jump in gold prices during the U.S. election, positive investor sentiment picked up when traders digested the reality of president-elect Donald Trump. The U.S. Federal Reserve then raised rates in December and has hinted at several more over the next year.

As all gold investors should know, bullion prices have an inverse relation with the U.S. dollar and interest rates, both of which have recently moved higher.

Gold miners have dealt with the low-price environment by taking a page from a common corporate playbook: they slashed expenses, sold non-core assets and reduced debt loads.

But such moves are just the “lowhanging fruit,” Ball said, adding that miners must make bolder changes if they truly want to get investors excited about gold companies.

Another common recent strategy for miners has been to scour the world for safe-bet projects in far-flung locations, rather than gamble on exploration projects in the backyards of their existing projects — again to their detriment, Ball said.

“My thesis is that mining is not scalable: it’s not Google,” he said.

For one, mining is a depleting asset; that search engine can run forever. Unlike non-resource-dependent industries, mines don’t have many synergy opportunities when combined under one corporate umbrella, because they’re geographically diverse, separate and unique entities. The industry’s scalability issue was hidden for years because high gold prices attracted investment bankers. But since the financial crisis of 2008, there’s been a big breakdown in the price of gold and gold miner shares, Ball noted, with growth in the latter falling short.

If a gold company can’t outperform the price of gold, it might as well break up and give the cash to shareholders. That’s Ball’s pledge to shareholders at Abitibi Royalties, which owns royalties — or a right to receive a percentage of a mine’s production — including three at Canada’s largest gold mine, Malartic in Quebec.

The company is a small player in the mine royalty space, dominated by the likes of Franco-Nevada Corp., which is valued at $14 billion, 14 times as much as Ball’s Val D’Or, Que.-based company.

Still, Abitibi Royalties shares are up some 185 per cent since this time last year, compared to Franco-Nevada’s 18.5 per cent growth. In 2015, during a down market for gold, Abitibi shares rose 29 per cent.

The seeds of Ball’s “one company, one mine” theory were planted by his mentor and one of the biggest names in Canadian mining, Rob McEwen, whose net worth was once tied up in Goldcorp Inc., the company he founded and ran for two decades.

During McEwen’s tenure, the company had one significant mine, so “literally every day he would go into the office with a laser focus on that mine,” Ball said.

McEwen, who praises Ball’s “innovative ways to make money,” gave his protégé his start, hiring him at Goldcorp out of university in 2004. Ball followed McEwen to what would become McEwen Mining Inc., and at age 26 made a key silver discovery at El Gallo II before going on to become president of the company. After a decade spent in various stressful positions, Ball decided there had to be an easier way to make money. He parted ways with McEwen Mining in 2014 to take the reins at Abitibi.

“I remember being in one of the pits and we were moving 50,000 tonnes per day from the pit and checking the cash spent versus the cash made every week and I was thinking, ‘We’re moving all this rock and this is all the money we’re left with at the end of the day? This sucks.’ ”

Being in the royalty business allows him to be nimble: there are no capital costs, and it’s easier to scale up. The company could grow to $100 billion in revenue from $1 billion and still have 30 employees and little overhead because they are not operating a mine.

Taking cues from one of the world’s most notorious disrupters, Ball has spent much of the last year focused on what he calls “the Uber of mining” — an online database, where junior miners in need of money can upload information about their projects and, if selected, Abitibi will pay claim fees in exchange for a royalty.

Junior miners are guaranteed to get an answer within 48 hours, rather than the weeks it might otherwise take with traditional financing models. So far, he’s reviewed more than 100 proposals and closed 14 deals.

Ball — a millennial who is equally inclined to drop quotes from either Justin Bieber or Warren Buffett — opts for a lyric from the Canadian superstar to explain his desire for a return to a simpler structure.

“The grass isn’t greener on the other side, it’s greener where you water it.”

Applied to mining, Ball said the major companies have focused on growth from acquisitions, which increases their reserves but also their costs and production headaches, instead of driving productivity and increasing production at just one flagship project.

The latter strategy, he said, would generate a level of shareholder reward and excitement the industry hasn’t seen in a long time.

“If you had a management team, who had most of their net worth tied to that one asset, they can have laser focus on developing it,” he said.

Management would therefore have more time to spend with geologists at mine sites addressing challenges hands-on rather than by email or phone from a head office in Toronto.

Meanwhile, investors, tired of bad returns year after year, would hold 10 “one-mine” companies in their portfolios rather than one conglomerate. In this radical reorganization, a major, say, Barrick Gold Corp., would break into 10 regional companies such as Barrick Hemlo in Canada or Barrick Goldstrike in Nevada. Each Barrick Gold share would break into 10 shares, each focused on a different mine. Investors could micromanage their portfolios by keeping the ones they want and sell those they don’t.

“It’s a bold move, but you need that because right now we’ve become bad proxies for the gold price,” Ball said. “That’s not an investment, that’s speculation.”